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Profiting From Active Trading

Bond trading continues to pay off for Lehman Brothers.

Frequent trading -- bad for the individual investor, but very good for the likes of LehmanBrothers(NYSE:LEH). While business was largely down across the board from the first quarter, good year-over-year performance in the capital markets segment fueled pretty respectable numbers for the second quarter.

Total net revenue climbed 12% to $3.3 billion, and net income likewise increased 12%. Investment banking was rather soft (up 6%), but the capital markets business was solid (up 14%), and investment management posted double-digit growth as well (up 10%).

Within capital markets, fixed income was again a source of strength. Although management acknowledged that the mortgage debt market has become more challenging, fixed income revenue was still up 23% compared with last year (though down 15% from the first quarter).

Management made a few pronouncements and projections on where it sees the economy and markets heading. Lehman management is pretty much in step with much of the market on interest rates -- the Fed will likely continue to raise them through next year and will probably stop somewhere in the 4% area.

In the meantime, the yield curve should stay fairly flat -- a situation that won't exactly be terrific news for banks. Elsewhere, management sees Corporate America having a considerable amount of cash on its books and believes strategic mergers and acquisition activity is beginning to pick up.

By and large, investment banks like Lehman Brothers are plays on the overall health of the global economy. When times are good, companies perform well and the markets perk up. What's more, healthy economies usually mean growing companies, and that means mergers, acquisitions, financing events -- all activities from which Lehman can take a cut for itself.

Lehman Brothers is one of the largest investment banks, but also among the cheapest -- at least by conventional standards. Factor in a solid backlog of business, and the company should do all right so long as we don't see any major unexpected volatility in the capital markets.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).